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Animal magic: solid growth outlook for pet-related companies
People have continued to spend on the health and wellbeing of their pets during the pandemic, implying that retailers and service providers in this area should be fairly resilient.
While the UK pet population has been broadly stable for the past decade, spending on pets has grown by 7% annually over the same period according to investment bank Liberum.
Spend on vet services has also seen strong growth in recent years, by circa 6%; however, the main driver of the overall increase has been the humanisation trend, which has seen owners spend on discretionary items for their pets.
Adoption rates at animal shelters around the world jumped during the pandemic as people looked to relieve lockdown-induced isolation. This has helped to boost the pool of individuals to which companies can sell pet food, accessories and medicines.
In its first quarter update, pet care specialist Pets at Home (PETS) said it had ‘been encouraging to see tangible signs of heightened demand for pet ownership, a good proxy for longer term growth in the market, as people adopt new attitudes to work and leisure pursuits.’
Chief executive Peter Pritchard encapsulated the attractions of the market by saying: ‘In spite of the rapid, wide-ranging and devastating effects of the pandemic, we have remained open for our customers throughout the period and we are emerging as a stronger business. The inherent resilience in our pet care model and the underlying pet care market, as well as encouraging signs of increased pet ownership, all underpin our confidence in seizing the future.’
Among the London-listed stocks in the healthcare space is vet practice operator CVS (CVSG:AIM). It has shifted from a mergers and acquisitions-led strategy to an organic growth plan under a new management team led by Richard Fairman.
Liberum says the diversified animal health sector encompassing veterinary services, retailing, pharmaceuticals and breeding, is an attractive one, seeing 4% to 5% annual growth and boasting high barriers to entry.
Many companies operating in this space have shown dogged resilience during the Covid-19 pandemic. They are highly prized by investors and have seen their share prices scurry higher as a result.
Liberum notes the market for companion animal therapies and vaccines, where Dechra Pharmaceuticals (DPH) is a leading player, is worth $12 billion globally and has grown by a consistent 4% to 5% for the past decade, while the European retail market for pet products is worth £25 billion and growing at 3% annually.
Although pet ownership has been more or less stagnant for a decade pre-Covid, this masks a shift in the mix away from low-cost rabbits to higher-cost cats and dogs, which has been boosted by pet owners spending more per pet than ever before.
‘While 4% to 5% annual growth is encouraging, it has been a challenge to meet it,’ cautions Liberum. ‘Corporate entities are consolidating the vet space, which is raising acquisition multiples, increasing price pressure and making it more difficult to entice/retain vets.’
It says there has been a decade-long shortage of UK trained vets, which has been covered by EU migration, ‘something that looks increasingly under threat as we enter the final stages of Brexit’.
A VARIETY OF STOCKS
Priced at 282p, shares in Pets at Home are 32% up on the 213p at which we added them to our Great Ideas list in September 2019.
We remain positive on this business, despite prevailing economic uncertainties, since Pets at Home is winning share in a structural growth market and is generating growth online.
Admittedly, like other retailers, Pets at Home’s operating costs have increased to cope with social distancing measures, though the long-term outlook remains positive, underpinned by a burgeoning band of loyalty card members and subscription customers.
Overseas stocks relevant to the broader animal health theme include Swiss food giant Nestle, which has bulked up its Purina PetCare division with the acquisition of premium cat and dog food brand Lily’s Kitchen, and European online pet product retailer Zooplus.
The second quarter was better than expected for US-listed Chewy while Nasdaq-quoted Freshpet has performed strongly since its 2014 stock market debut. The US is also is home to Zoetis, the world’s largest animal health company which was spun out of drugs giant Pfizer in 2013.
On the UK market, the pet theme is relevant to veterinary pharmaceutical products group Animalcare (ANCR:AIM), aquaculture biotechnology specialist Benchmark (BMK:AIM) and livestock products firm Eco Animal Health (EAH:AIM), ‘all now focused on new strategies and in some cases restructuring their businesses’ according to Liberum.
Veterinary pharmaceuticals concern Dechra reported underlying operating profits 0.7% ahead at £128.3 million for the year to June and increased the dividend by 8.5% to 34.39p.
Dechra’s treatments include Mirataz which is the only approved medication for the management of weight loss in cats in the US and Europe, and dog diabetes product Akston. It continues to deliver growth ahead of the market.
Another of Shares’ Great Ideas is animal genetics leader Genus (GNS), which smashed forecasts once again when reporting annual numbers (8 Sep), despite the challenges of Covid-19 that affected supply chains in January and tough second-half comparisons, highlighting the company’s resilient qualities.